GSEs Keep the Multifamily Market Moving Forward
- Sep 02, 2020
Nearly six months after the federal government issued shutdown orders, the government-sponsored enterprises have become a vital relief valve for the multifamily industry. Not only have they rolled out critical forbearance programs to help hard-hit landlords stay afloat during the pandemic, but they also are injecting liquidity into to the market as other capital sources have reined in financing.
The forbearance initiatives, which became part of the coronavirus relief bill, initially allowed borrowers with mortgages backed by federal government agencies to stop paying mortgages for up to 90 days. The programs also shielded tenants from evictions during the forbearance period.
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In late June, the Federal Housing Finance Administration extended the programs to provide up to 90 more days of relief. Borrowers can take up to 24 months to repay the deferred principal and interest, depending on their circumstances.
Freddie Mac and Fannie Mae in the past had provided forbearance in response to hurricanes and other disasters, but this was the first time that they had launched a nationwide effort, said Leanne Spies, senior vice president of asset management and operations for Freddie Mac.
“Before a lot of businesses went remote or closed down, we thought this was going to be larger than anyone thought,” she said.
“We looked at how we could help not just our borrowers but also their tenants from a housing and stability perspective. We modified our disaster relief plan that we had in place for Hurricane Harvey in 2017 and were able to launch the program quickly for borrowers that needed it.”
The need has been relatively light. Freddie Mac reported that 1,189 multifamily loans totaling $7.9 billion were in forbearance at the end of June. That represented 2.6 percent of the total unpaid balance on the agency’s securitized, small balance and K-Deal mortgages and 5 percent of all loans. Small balance borrowers made up 75 percent of the forborne apartment loans, representing 30 percent of total unpaid balance. What’s more, the number of multifamily loans entering forbearance grew by just 178 in June, a sharp drop from May’s increase of 678.
Meanwhile, Fannie Mae reported that 295 multifamily loans totaling more than $4.5 billion, or 1.3 percent of the unpaid balance of its apartment loan portfolio, were in forbearance as of July 28. The agency has witnessed “modest month-over-month increases in forbearance requests,” according to Charles Ostroff, senior vice president of multifamily for the agency.
The low percentage of borrowers enrolling in the program illustrates the multifamily sector’s resiliency during the pandemic, observers say. Monthly rent collections through July remained around 90 percent since the shutdown in mid-March, by and large just a percentage point or two below collections a year earlier, according to the National Multifamily Housing Council.
“In general, the programs have not had a huge uptake because the portfolios of Freddie and Fannie have performed particularly well in terms of collections,” said David Borsos, vice president of capital markets for NMHC. “Even if collections are down, the forbearance program is something that borrowers need to think long and hard about if they can make their mortgage payment.”
The program is scheduled to run through the end of the year unless the national emergency ends sooner. Whether the GSEs will need to extend or modify their forbearance initiatives depends on economic conditions, the course of the pandemic and governmental action.
While Congress has yet to agree on a new relief package, last month President Donald Trump issued a memorandum that would provide unemployment benefit recipients an additional $300 per week (the previous relief package included an additional $600 for three months as well as cash payments for all citizens). But those funds are not expected to flow until mid- to late September. Meanwhile, on Sept. 1, the Centers for Disease Control and Prevention issued an eviction moratorium that will last through Dec. 31.
In some cases, property owners have chafed at the restrictions on evictions because there’s no guarantee that renters will fully reimburse landlords, said Peter Mekras, president of Miami-based mortgage banker Aztec Group. Plus, apartment owners have no way of knowing whether tenants have the wherewithal to pay rent but are choosing not to.
“There is a real lack of transparency,” he explained. “Typically, landlords don’t know there’s a problem until the rent doesn’t come in, and property managers usually hear the story—maybe the tenant lost a job, has been sick, or is lending money to a family member in dire need. But under the forbearance program, tenants aren’t obligated to have a conversation, so landlords don’t know who can truly pay and who cannot.”
In addition to assisting struggling landlords, the GSEs have become the go-to source for financing. The agencies already held close to 50 percent of the roughly $1.5 trillion in outstanding multifamily debt, according to the Mortgage Bankers Association, and their share may increase in the short term.
Fannie Mae’s new loan volume of $7.5 billion in June represented a year-over-year increase of 20 percent. Likewise, Freddie Mac’s new loan business of $9 billion for the month marked a year-over-year increase of 25 percent. Year-to-date loan volume of $33.7 billion and $30.2 billion for Fannie Mae and Freddie Mac, respectively, was still slightly lower than the total for the same period last year.
At the end of June, each provider had about $50 billion remaining in production capacity for the year. The Federal Housing and Finance Administration capped volume at $100 billion for each agency over five quarters beginning in the fourth quarter of 2019.
“Of the five or six sources of primary debt financing for the multifamily industry, clearly Freddie and Fannie are playing a countercyclical role when other capital providers have backed off a little bit,” Borsos said. “We’re not that concerned about the production cap, but we’re watching it closely.”
At the same time, life insurance companies and banks are beginning to reenter the market, and although cautious, they’re not shy about competing for the right deals, observers say. Given the fact that interest rates for seven- to 10-year loans are hovering around 2.5 percent to 3 percent, refinances make up the vast majority of activity.
“Even if you have to pay a yield maintenance penalty, refinancing at these rates still might be worth it,” said Kyle Draeger, senior managing director for CBRE in Boston.
Gary Tenzer, co-founder of Los Angeles-based George Smith Partners, has received competitive offers from different capital providers for two large multifamily deals on which he’s working—one to take out a construction loan and the other to refinance an older asset. Banks, life companies and the GSEs are all “on top of each other” with their financing offers, he said.
“Unless you need a very low level of leverage, at which point a life insurance company can step in, GSEs are still the lender of choice for long-term financing,” Tenzer said.
Value-add transactions in particular are nonexistent, and acquisitions remain subdued. Still, some buyers are reentering the market, albeit slowly, said Jeff Erxleben, executive vice president & regional managing director for NorthMarq in Dallas.
“Activity is definitely not free flowing like it was 12 months ago,” he explained. “But investors still believe in the long-term outlook of this space, and good loans available at 3 percent with interest-only terms are why some deals are still moving forward.”